Eibor declines from six-month peak

The country's benchmark interest rate has declined from record-high levels following the Government's injection of money into the financial system.

The country's benchmark interest rate has declined from record-high levels as the Government's injection of money into the financial system starts to take effect. The Emirates interbank offered rate (Eibor), the interest rate banks charge each other, has declined from a six-month peak of 4.79 per cent last Thursday, more than double the rate in April. The rate fell to 4.58 per cent yesterday. The rate serves as the yardstick for other interest rates in the economy.

Analysts say this could be the beginning of a downward trend after rising steadily since May. "It is basically a recovery of confidence on the interbank market," said Sofia al Bouri, a research analyst at Shuaa Capital. The Government has injected Dh25 billion (US$6.8bn) into the banking system, the first tranche of a planned Dh70bn announced last month to help banks during the global credit crunch, according to Younis al Khoori, a general manager at the Ministry of Finance and Industry.

Emirates NBD, National Bank of Abu Dhabi and Abu Dhabi Commercial Bank, the country's three largest banks, said they received their portion late last week. Bankers said they were unlikely to use the money to initiate loans, but would continue to support current borrowers. "I don't think anyone has the appetite for new loans now. The fund will be used to meet existing commitments and to maintain our liquidity," said one senior banker.

Still, the new funds are beginning to ease lending conditions between financial institutions, although interbank rates remain historically high. A ministerial committee is working on the conditions for the second disbursement of the package. The committee includes Obaid Humaid al Tayer, the Minister of State for Financial Affairs; Sultan bin Saeed al Mansouri, the Minister of Economy; and Sultan bin Nasser al Suwaidi, the Central Bank Governor.

Deposits are the cheapest way to fund a bank's lending business. Many UAE banks benefited earlier this year from an injection of foreign capital, hoping to take advantage of a dirham appreciation. When this did not happen, the so-called "hot money" left the country. Anxious to prevent the economy from slowing, the Government has stepped in with a number of initiatives including the Dh70bn injection, and guaranteeing deposits at domestic banks and even some foreign banks operating in the country.